Economics Day 4.docx

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School

Wilfrid Laurier University

Department

Economics

Course

EC120

Professor

Olivia Ozlem Mesta

Semester

Fall

Description

Economics Day 4
Chapter 6
Lecture: Wednesday, October 3
Government Policies That Alter the Private Market Outcome
 Price controls
o Price ceiling- a legal maximum on the price of a good or service (rent control)
 A price ceiling above the equilibrium price will have no effect on market
equilibrium
 A ceiling set below equilibrium will result in a (quantity demanded is greater
than quantity supplied)
 In the long run because both supply and demand are more elastic so the
shortage gets larger
o Price floor- a legal minimum on the price of a good or service (minimum wage)
 a price floor below the equilibrium price it will have no effect on the market
equilibrium
 a price floor set above the equilibrium will result in a surplus of unemployed
workers (unemployment)
 Taxes
o The government can make buyers or sellers pay a specific amount on each unit
bought/sold
Shortages and Rationing
 With a shortage sellers must ration the goods among buyers
 Some rationing mechanisms
o Long lines
o Discrimination according to seller biases
 these mechanisms are often unfair and inefficient the goods don’t necessarily go to the buyers
who value them most highly
 In contrast when prices are not controlled the rationing mechanism is efficient (goes to buyers
who value them the most and is fair)
Are Rent Ceilings Fair?
 A rent ceiling does not generally benefit the poor
 A rent ceiling decreases the quantity of housing and scarce housing is allocated by
o Lottery
o First come, first serve
o Discrimination
Evaluating Price Controls  Recall one of ten principles: markets are usually a good way to organize economic activity
 Prices are the signals that guide allocation of society’s resources this allocation is altered when
policymakers restrict prices
 Price controls are often intended to help the poor but they often hurt more than help
o Minimum wage can cause job losses
o Rent control can reduce the quantity and quality of living
Evaluating Minimum Wages
 Arguments against minimum wage
 Minimum wages are probably the most contentious example
o People argue that a worker cannot make a living wage on a low minimum wage-
that is certainly true but the issue is who makes the minimum wage- if it is primarily
students then we do not expect them to be supporting a family
o There is also little evidence that raising the minimum wage has reduced us to
poverty
o One of the arguments against minimum wage is that only those people who have
jobs and keep them benefit from the minimum wage.
o The unemployed end up wo